The response of the US economy to both the prospect of higher interest rates above 5% and Fed Chairman Jerome Powell’s tough hawkish speech last month was a 3% rise in retail sales and the labor market, which created 517,000 new jobs, most of them into services. Indeed, we are in uncharted waters as the so-called “reaction” of the market and economic indicators to monetary tightening is currently extremely limited. There are several versions of this. Perhaps the transfer of monetary policy is delayed, so that we do not immediately see the consequences of the restriction of money supply and spending. However, households and businesses are doing well as deposits and income fuel spending. And markets for luxury goods and services are booming. Perhaps the upper middle class continues to spend impressive sums, while people with lower incomes apparently spend all the money they receive. Another version is that alternative forms of financing have developed that to some extent bypass high lending rates, while in some markets the yield can be so high that it bypasses, exceeds the level of interest rates.

Meanwhile, the signal to deal with this increase in spending is higher interest rates. Above 3% from the ECB, above 5% from the Fed. There is, of course, the possibility that the effect of the rise in the value of money will create a “coyote” situation, as L. Summers calls it, a situation in which the world economy is sharply slowed down, and then everyone is exposed to excess stocks and many workers who are not needed. However, in relation to the latter and the labor market in the United States, the phenomenon is impressive. Labor force participation has reached pre-pandemic levels, but the market is still hot, especially in the services sector. Maybe it’s the middle-skilled workers who are constantly changing jobs, maybe the 50-year-olds who retire early, maybe the millennial generation who have a different view of the relationship between work and work.

We are currently in a situation that leads us to the idea of ​​various states of the economy, a period when high, albeit slowly decelerating, inflation coexists with rising spending and employment, and interest rates continue to rise, which leads us to the idea of ​​inflation that will persist for a long time, while the final interest rate may remain high for longer than one might expect. Some even, like Ol. Blanchard, they talk about an inflation target above 2%, maybe even 3%, which would make it easier for central banks, but on the other hand, it would be a blow to their credibility.

Finally, the impending rapid recovery in the Asia-Pacific region and especially, of course, China is expected to further complicate the work of central banks, in any case, in today’s fragmented world, economic policy makers must be on constant alert.

Mr. Theodoros Pelagidis is Deputy Governor of the Ministry of Finance and Professor of Economic Analysis at the University of Piraeus.